Google, Facebook, Twitter, WhatsApp, Zynga, Airbnb, Uber etc etc. These are all companies that have come from nowhere and are now market leaders in an increasingly mobile and digital world. They have built their brands and revenues on populations that are increasingly sucked in (some would say addicted…) to this new world of digital apps. However, Africa is still playing catch up. If you exclude the telcos, no household African IT or social media company has emerged. Nevertheless the TMT sector in Africa is growing and thriving.
The National Intelligence Council identifies technological advancements as having a game-changing role within the global economy. This is especially visible in Africa where development and economic growth powered by technological change can be seen across the continent Africa (…just ask any farmer or trader in Kenya who uses M-Pesa to trade). The combination of rapid technology uptake, growing populations and an expanding middle class is creating exciting new opportunities for both local and international players.
Already by mid-2013, the Economist labelled the information technology sector in Sub-Saharan Africa as “the next frontier” whereas Bloomberg called Africa “the tech industry’s next China”. Particularly relevant in a TMT context, leapfrogging (i.e. applying innovation to fast-track the development of a system and avoid development costs incurred and mistakes made by others) in the African TMT sector looks set to move Africa towards those labels given by the Economist and Bloomberg.
However, despite such optimism, the sector outside of telecoms is still regarded as being at a nascent stage and faces many challenges. Many technology-based businesses in sub-Saharan Africa are still highly dependent on technology transfer from non-African partners.
Moreover, to develop competitive high-tech industries of their own, African states will have to upgrade their education systems and create the environment to combat the significant brain-drain out of Africa. None the less technological growth and investment in the broad TMT sector presents an array of opportunities for those looking to deploy capital into sectors and geographies with high-growth potential as well as for those African countries looking to exploit growing international investment interest and convert this into broader economic growth.
Telecoms has over the past few years been, and continues to be, the primary driver of TMT growth in Africa, particularly in the mobile space. The use of data services is growing strongly in Africa, along with data revenues, fuelled by factors such as the continent’s improved international connectivity, the rollout of mobile broadband networks and the increasing availability of low-cost smartphones. Generally a lack of infrastructure to support accelerated growth has been cited for the slow growth in other niches of the TMT world. However there is evidence of this changing in numerous tech hubs in cities such as Nairobi, Lagos and Accra.
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A new e-commerce sector is burgeoning in West Africa where online retail is now competing with the traditionally strong mobile payments sector for investment and talent. An example is Nigerian online retailer, Jumia which offers a selection of electronics, fashion, home appliances and children’s items, and allows for a variety of payment options including cash on delivery—particularly important in the region given the traditionally low take-up of online banking. Other notable West African online commerce sites include Ghana’s Kasoa.com, Nigerian classified ad site OLX and Konga, a Nigerian competitor to Jumia.
In the media space, growth has been slower than that seen in telecoms however a noticeable trend in this area has been a shift in consumer interest from international media content toward a focus on local and national programming. A process of digital migration in broadcasting which was targeted in a number of African jurisdictions for June 2015 has been slow and costly and it seems that a number of states will not meet this timeline. This has dampened international interest in the sector over the last few years however there are now signs of a growing interest (particularly in the hubs of Nigeria and Kenya) with South African and other international media players looking to take advantage of fast growing audiences and advertising revenue.
Deal wise, the vast majority have been in the form of acquisitions or direct investments. Exits are at this stage relatively few and far between given the sector's stage of development. IPO's are rare because of the lack of depth of capital markets and (relatively small) size of deals. It remains to be seen how successful exits from existing investments are and investors are sure to be keeping a keen eye on the market in this regard.
Transactions in the TMT space in Africa (particularly in media and tech) have a unique set of challenges which investors are coming up against. One of the key issues in a broadcast media context are state controls over privately owned media. This affects all aspects of an investment, including deal structuring, execution, post deal day to day operations and exits. Most African countries see broadcast media as a particularly sensitive sector given its ability to reach and influence large sections of the population. As such, broadcasters are often subject to strict local ownership restrictions, cross-media restrictions, local content obligations and editorial control/scrutiny.
The requirement for approval of the relevant media regulator is almost a certainty in most jurisdictions which can be a frustrating process if not managed correctly from the outset. In addition there are a plethora of other regulatory bodies which are relevant to the investment process, including competition authorities such as COMESA and state banks amongst others. The often uncertain regulatory approval process can lead to a lack of certainty for exit and therefore a trepidation to invest in the first place.
Another often overlooked transactional issue arising on deals in the sector is the enforcement of restraints of trade and intellectual property rights locally. Given the reliance of businesses in the media and tech space on key individuals (and in the African context key local individuals) and IP, a restraint of trade and enforceable IP rights are often vital to the protection of the value of the business. However these need to be enforced in local courts to be of any value which can be a costly, lengthy and sometimes unsuccessful process. Also share capital structures tend not to be as flexible as they are internationally and are generally more cumbersome. This combined with local ownership restrictions can lead to difficulties in deal structuring and exits and requires the development of innovative and effective mechanisms of incentivising and retaining key individuals.
Our experience of the key issues you have to focus on in TMT transactions in Africa are …..:
- Ensuring quality of due diligence - nothing makes up for advance knowledge of issues and a thorough due diligence can add immense value to an investment. It also means that issues can be dealt with upfront rather than relying on contractual protections such as warranties / indemnities which may have enforcement and recovery issues down the line.
- Ensuring you have the right local partners and people on the ground with local knowledge - having bodies, ears and eyes on the ground is crucial to navigate the complex regulatory and commercial environment.
- Structuring for tax and bilateral investment treaty protection - understanding structural issues early on and putting in place appropriate tax structure and investment protections can be the difference between a successful exit and a failed investment.
- Having the right local and international advisers - hiring advisers who both understand the local environment as well as having the international experience to be able to see ahead to, and provide for, a smooth exit.
- Putting the appropriate level of corporate governance in place.
Successful tech products and media content in other jurisdictions will not automatically translate to Africa due to material differences in infrastructure, social and economic landscapes. As such some international players have struggled to import content and products developed in more global markets. However our view is that there is tremendous upside potential for investors looking at the African TMT sector. Technological leapfrogging, an expanding middle class and an entrepreneurial spirit are all combining to create a surge in the sector, importantly in areas outside of traditional telecoms. Our view is that the key growth area for TMT in Africa (outside of telecoms) will be local content / product producers developing products to cater for local demand and needs with international financial and experience to support the development. Its an exciting time!